11

Jack GarrityExecutive DirectorAsia Society Washington

May 10, 2011

CHINA GONE GLOBALCHINA GONE GLOBAL

22

“All political power comes from the barrel of a gun.”

33“The economy is the basis for global power.”

4

Can the United States have Guns and Butter too?

5

US Still Out-Spends the Globe on Defense

6

However Military Spending Has Risen Across the Globe

7

China’s Booming Economy

8

Population Overview

9

2010 GDP 2010 GDP Growth Rate: Growth Rate:

10.310.3

China‘s GDP (1990-2010)

10

China‘s GDP Growth (1990-2010)

11

China‘s GDP Map 2010

12

Economic Powerhouse-GDP

13

China‘s GDP Compared to Other Countries (2000-2010)

14

Output and Outlook 1820-2001 India, China and US

15

Forecast of China’s and US GDP

16

China’s real per-capita GDP(1980-2000)

17

Rich- Poor Gap is Enlarging

18

China‘s GDP/per capita (2000-2010)

19

Gini Coefficients 1980-2006

20

China’s household saving

21

Hukou Household Registration

22

China’s GDP per capita of $4,200 in 2010 was only 9 percent of

that in US

China’s standard of living today is roughly comparable to that of :

•Japan in 1954

•Taiwan in 1972

•South Korea in 1976

China’s Living Standard is still low

23

When will China become the largest economy

24

ECONOMIC CONCERNS AND CHALLENGES

25

Major Structural Problems: Stability /Sustainability of Chinese Economy

26

Unsustainable export level (Export over GDP ratio)

27

Unsustainable Low Domestic Consumption (Household consumption over GDP ratio US vs China)

28

Unsustainable Low Labor Income (Declining Labor income over GDP ratio

29

Unsustainable High Saving Rate. (China VS the rest of the world, 1978-2006)

30

Too much Enterprise and Government Savings

31

The Share of Household Saving in National Saving has declined substantially

32

Most government investment in China are Local Government Investments

33

Local government are in deficit. Poor regions have higher deficit

34

Is China’s real GDP growth sustainable ? Optimistic forecast versus official targets

35

How much progress can we expect from the 12th 5 Year Plan

36

The most challenging problems come from regional competition which has been essential for China’s growth

37

The institutional foundation of regional competition

38

Why regional competition is becoming a source of problems

39

Non-Market policies would not work

40

Market oriented policies may work

41

GROWTH DRIVEN BY INVESTMENT AND TRADE

42

CHINA’S FDI INFLOW

43

•Roads

•Power

•Ports

•Airports

•Apartment Blocks

Domestic Infrustructure Spending

44

Railway Crossing| High-speed Network Lengths by Comparison

45

Map of High Speed Railway

46

Map of High Speed Railway (Planned)

47

Will High Speed Railway Speeding Up Economic Growth?

•It will spread economic development farther west, by slashing travel time between Chinese cities it will spur trade and ease the flow of people and ideas, its proponents and tourism industries are all tipped as big winners.

48

Capital Growth

4949

Foreign Direct Investment into China

50

•Factories

•Manufactoring facilities

Foreign Investment Spending

51

China’s FDI inflow VS domestic investment

Source: China National Bureau of Statistics Source: China National Bureau of Statistics

$3596bn

$68bn

$379bn

$20bn

$bn

China's FDI Inflow VS Domestic Investment

0

500

1000

1500

2000

2500

3000

3500

4000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Domestic Investment FDI

52

Government Debt is Scrambling

53

China’s Public Debt is More Than 80% of GDP

54

CDB’s Foreign and Domestic Lending, 2005-2009

55

Investment Contribution to GDP Growth

56

•China’s low returns are getting lower.

•China achieves about $2.20 in economic output per dollar invested, down from $3.40 in 1980. The United States gets almost $6.50.

(Indonesian efficiency surges after I.M.F.- led overhauls in the late 1990s. Every dollar invested produced $5 in output. Now $3)

•China favored sectors like heavy industry and property, producing overcapacity and asset price bubbles. It means China needs more investment in its agricultural sector.

Is China One of the Asia’s Flying Geese?

57

•Intellectual property rights protection

•Directed lending by state banks to Chinese competitors

•Indigenous innovation policy

•Currency undervaluation capital control

•Non-tariff barriers

•Restrictions capital movement

Investors’ Complaints to China

58

Intellectual property rights protection

59

TRADE

60

China joins WTO in 2001

China’s Exports and Imports(2000-2010)

61

http://online.wsj.com/article/SB10001424052748704062604576105691622922576.html

Garment trade with EU

62

Garment trade with US

6363

China in the Global Economy, 2009% share of the global total

Sources: UNDP, NBS, UN Comtrade, SAFE, UNCTAD, IMF, World Bank, RHG; *China‘s share in global total as available from the IMF in November 2010, 101 countries

64

Production surplusProduction surplus

China’s Production Surplus

65Source: WTO data http://www.wto.org/english/news_e/pres11_e/pr628_e.htm

World Trade 2010- Top 10 exporters

66

China and Developing states Projected to keep a favorable trade balance

67

1990

China

4%

2010

20%

China’s Rising Share of Global Trade

$3,517 bn$3,517 bn

$15,518 bn$15,518 bn$138 bn

Surplus: $40 bn Surplus: $571 bn

China:China:

$3,122 bn$3,122 bn

68

20%

1990

U.S.trade

$900 bn

2010 U.S. trade $3,031 bn

20%

26%

$3,517 bn$3,517 bn

$15,518 bn$15,518 bn

Deficit: $ -82 bn

Deficit: $ -529 bn

U.S.’s Share of Global Trade 1990 vs. 2010

69

China’s Global Trade by region 2000 VS 2010 China's Global Trade 2000 VS 2010

other countries and area

Central asia/ caucusus

Canada

central America/ carribean

South Asia

Russia and rest of Europe

Oceana

Africa

south america

Middle East& N. Africa

China HK,Macao

ASEAN

US

EU

Northeast Asia

China's Total

In US bn

2243

16

4

11

13

6

7

10

15

9

3

6

4

6

3

5

times

times

times

times

times

times

times

times

times

times

times

times

times

times

times

times$2,723.5

510.8

479.9

385.6

292.6

230.0

174.7

133.3

109.8

103.8

85.1

80.5

48.4

37.0

31.4

20.5

$373.6

($125.2)

$143.0

$181.7

($16.1)

$210.7

($22.7)

($25.3)

($6.3)

($25.3)

$4.2

$34.6

$26.1

$7.4

$4.0

($17.3)

2010 ——2010 ——

2000 ——2000 ——China’s

surplus

70

Oceana$104

4%

South Asia$81

3%

Other countries and area$21

1%

Central Asia/Caucusus$31

1%

South America$133

5%

Central America/Carribean$48

2%

Northeast Asia$511

MEAF$175

US $386

EU $480

ASEAN$293

Russia and rest of Europe$85

3%

Canada $371%

Africa $1104%

HK,Macao$230

19% 6%

14%

18%

11%

8%

In Billion

China ‘s Global Trade by Region 2010

71

　 2000　 2010

　 Trade Exports ImportsChina's

surplus/deficit

　 Trade Exports Imports

China’s surplus/ deficit

EU $71.9 $41.1 $30.8 $10.2 　 $479.9 $311.5 $168.4 $143.0

Russia and rest of Europe

$12.3 $3.9 $8.5 ($4.6) 　 $85.1 $44.6 $40.4 $4.2

US $74.5 $52.2 $22.4 $29.8 　 $385.6 $283.7 $102.0 $181.7

Canada $6.9 $3.2 $3.8 $0.6 　 $37.0 $22.2 $14.8 $7.4

Africa $9.6 $4.2 $5.4 ($1.3) 　 $109.8 $51.7 $58.1 ($6.3)

MENA $17.7 $7.1 $10.6 ($3.5) 　 $174.7 $76.0 $98.7 ($22.7)

Northeast Asia $118.5 $53.5 $65.0 ($11.5) 　 $510.8 $192.8 $318.0 ($125.2)

China HK, Macao $54.8 $45.2 $9.5 $35.7 　 $230.0 $220.3 $9.6 $210.7

ASEAN $39.5 $17.3 $22.2 ($4.8) 　 $292.6 $138.2 $154.3 ($16.1)

Oceana $12.6 $6.6 $6.0 $0.7 　 $103.8 $39.3 $64.6 ($25.3)

South Asia $5.7 $3.8 $1.9 $1.9 　 $80.5 $57.6 $23.0 $34.6

Central Asia/ Caucuses

$1.8 $0.8 $1.1 ($0.3) 　 $31.4 $17.7 $13.7 $4.0

Central America/Caribbean

$4.1 $3.5 $0.6 $2.9 　 $48.4 $37.3 $11.2 $26.1

South America $8.4 $3.6 $4.8 ($1.2) 　 $133.3 $54.0 $79.3 ($25.3)

Other countries and area

$0.0 $0.0 $0.0 $0.0 　 $20.5 $1.6 $18.9 ($17.3)

Total $438.3 $245.8 $192.4 $53.4 　 $2,723.5 $1,548.6 $1,175.0 $373.6

China ‘s Global Trade 2000 VS 2010

72

China’s Share of World Trade (Shadow Chart) 1990-2010

China's Share of World Trade

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

7373

China’s Share of World Total Exports

74

China’s Share of World Total Exports ClearChina's Share of World Exports

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

75

China’s Share of World ImportsChina's Share of World Imports

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

76

Exports: Comparison among US, Germany, Japan and China

7756.2

56.9

61.7

62.5

74.2

86.9

142.4

206.8

227.7

296.6

385.6

Netherlands

Singapore

Inida

Brazil

Malaysia

Australia

Germany

South Korea

Hong Kong

Japan

United States

Netherlands

Singapore

Inida

Brazil

Malaysia

Australia

Germany

South Korea

Hong Kong

Japan

United States

China's Top 10 Trade Partners in 2010

In billion USD

78

Top 10 China's Imports in 2010

25.8

32.9

33.2

38.0

50.4

59.7

74.4

102.0

138.0

176.3

0.0 50.0 100.0 150.0 200.0

RUSSIAN

SAUDI ARABIA

THAILAND

BRAZIL

MALAYSIA

AUSTRALIA

GERMANY

UNITED STATES

SOUTH KROEA

JAPAN

In billion USD

79

Top 10 China's Exports 2010

29.592

31.142

32.333

38.776

40.880

49.711

68.069

68.811

120.262

218.205

283.679

RUSSIAN FEDERATION

ITALY

SINGAPORE

UNITED KINGDOM

INDIA

NETHERLANDS

GERMANY

SOUTH KOREA

JAPAN

HONG KONG

UNITED STATES

In billion USD

8080

China is the NO.1 trading partner of six G-20 nations

8181

China is the NO.2 trading partner of Canada, U.S, Indonesia, Mexico and Brazil

8282

As new powers grow…China is becoming ever more important to their trade.

83

China’s Current Account and percentage of GDP

84

China’s current account surplus

85

Trade Remedy Measures on China’s Exports Value ($ billion)

86

The Disappearing Cost Advantage

87

Comparison of population in China, Indonesia and Brazil

China is now Indonesia's biggest export market, having almost doubled its share in the past decade to about 12.5%.

88

Population Matters

•A Chinese slowdown is a risk.

•Both brazil and Indonesia also have vibrant domestic sectors. Household consumption equated to 65% of Indonesia's gross domestic product last year, similar to brazil and well above china’s level of about 40%.

•In brazil, mortgages outstanding equate to a mere 3% of GDP, compared with 72% in the U.S., and 18% in China.

•Indonesia is set to reap a demographic dividend as its working-age population grows 21 million people by 2020. While china’s working population peaks this decade, creating a headwind thereafter. Brazil’s will peak in 2030.

89

Aging Society

90

RMB EXCHANGE RATE

9191

China’s currency has risen against the dollar recently, but against a broad basket of currencies it is basically flat.

92

RMB against USD 2000-2010

93

REER USD CNY

94

CNY/ EUR/ JPY

95

CNY/USD/JPY/EUR

96

Big Mac index, CNY is the most under valued currency

Source: McDonald’s; The Economist. At market exchange rate (2010 Oct 13th)Source: McDonald’s; The Economist. At market exchange rate (2010 Oct 13th)

97

The Yuan has strengthened against the dollar and euro over the past several years, leading some economists to say it is approaching fair value

98

Does China Really Appreciate Their Currency

99

U.S. imports from China may shrink, they may be replaced by imports from other emerging markets

100

Yuan Internationalization

101

• China keeps a rein on capital moving into and out of the country.

• The government sets the maximum rate banks can pay to

depositors and the minimum they can charge for loans- a boon to

the large state-owned banks because the rules give them a cheap

source of savings and limit competition from private financial firms.

• The managed exchange rate is frustrating Beijing’s commercial

and political aspirations.

• Surplus of foreign reserves is locked away in low-yield U.S.

treasury securities instead of helping develop the country

• The exchange rate has become a sort of burden on china. We are

creating a lot of distortions in the economy to maintain it.

Limiting the international use of the Yuan

102

Currency Changes will be Difficult

•China now accelerating the appreciation of Yuan, now 6.49 = $1 – the lowest since 1990s

•Letting the Yuan rise and fall freely on world markets could cause pain

•Decrease in exports, job loss; Increase in imports

•Remove restrictions on loan and deposit rates, as deposit rates below inflation transfers wealth from savers to borrowers

•Major impact on entire financial system

103

Currency Pros and Cons

•Undervalued currency boosts trade surplus

•Has led to huge increase in foreign reserves

•Yuan prices of imported fuel and food increase

•Domestic inflation rises – now 5.4%

•Other countries upset at China’s “unfair” competition

104

Volume of dollar-Yuan swaps traded increases

105

Top 10 underwriters for offshore Yuan-denominated bonds

106

FOREIGN RESERVES

107

China’s foreign reserve holdings topped $3 trillion in March, nearly three times the holdings of Japan

107

$1.15 trillion is U.S. treasury

108

Foreign-exchange reserves keep rising

109

• China is the world’s largest foreign exchange holder, with reserves

exceeding $3 trillion; three times that of Japan.

• But these reserves do not give the government a good return, since they

are largely invested in low-yield products.

• Some analysts estimate yield could be 3 percent at best, while others

argue that the real value of china’s reserves has eroded when exchange

rates and inflation are taken into account.

•Snowballing reserves add to inflation and are disadvantageous to China in

international talks on its foreign exchange policies.

•Should allow individuals and businesses to hold and manage more foreign

reserves

The Consequence of High Foreign Reserves

110110

Internationalization of the Yuan

111

Using Yuan in Trade Settlement?

112

Criteria for being a dominant international reserve currency

113

The expectation of Yuan’s rise may lead to change of business strategy

114

INFLATION

115

Inflation may lead China to start revaluing its currency

115

116

China’s Consumer Prices

117

• China’s annual inflation hit 5.3%

•The increase in the amount and prices of imported bulk commodities played a major role in increasing China's imports and thus the quarterly trade deficit.

• China's iron ore imports grew by 14.4 percent to 180 million tons in the first quarter. The average price rose by 59.5 percent year-on-year to $156.5 a ton.

•The rising price of iron ore has stimulated domestic production. The quality of metallic minerals mined in China, in general, is lower than the imported ones.

• Soybean imports dropped by 0.7 percent to 10.96 million tons, but its average price increased by 25.7 percent to $573.9 a ton.

• China lifts banks’ reserve ratio to 21%, among the highest in the world.

Inflation facts

118A copper-products plant in Nantong, China: The metal bounced back from recent lows

COMMODITIES

119

Commodity Prices may increase and Hamper Growth

120

Metal prices go up

121

China’s refined copper imports drop

122

Copper reserves for selected countries

123

Steel Market

124

CHINA‘S DEMAND FOR ENERGY

125

China’s power picture

126

Typical urban household in China already has at least one air conditioners

127

Electricity consumption has soared in China

128

China is now the world Largest energy consumer

129

Power Output

Source: China Electricity Council

Unit: billion KWh

130

China and the US source their oil from different areas

131

Shanghai trucker strike as the price of oil surges.

132

In China, coal consumption has surged along with electricity consumption

      

                                                   

   

133

World Gold Reserves in 2010

134

Gold Rush

•The amount individual buyers purchase as an investment is expected to surge two-fold annually.

•And the government's gold reserves are "far from enough", and should be increased to fend off global financial risks.

•Since China deregulated its gold market in 2008 gold sales as a means of investment have surged, with an annual growth of 100 percent from 2007 to 2010, compared with 30 percent for the global investment market during that period.

•Inflation and the weakening purchasing power of the yuan have driven up private demand for gold and this will continue.

•China had more than $2.84 trillion in foreign exchange reserves by 2010, but only 1.7 percent were invested in gold.

•The government needs to expand its share of gold in the foreign exchange reserves to reduce vulnerability to dollar depreciation. The reserve should be at least 5,000 tons.

•In the first quarter, China overtook India to become the largest market for private gold sales.

135

China has gone from the world’s largest coal exporter to the largest importer

136

China’s nuclear

137

LABOR FORCE ISSUES

138

Guangdong Migrant Workers

139

EDUCATION

140

Many college graduates are more willing to work in places where the cost of living is lower as a result slightly smaller cities in China begun to grow at a faster rate.

Source: Chinese college graduates employment annual report

Graduate Employment

141

World Class-Average math and science scores for 15-year-olds in 2009

142

Chinese Travel

143

•The number of outbound travelers totaled more than 57 million

in 2010,a rise of 20.4 percent year-on-year,

• More than 57 million Chinese are expected to travel abroad

this year, and will spend a staggering $55 billion, (China

Tourism Academy). 

More Chinese Travelling Abroad

144

Visitors from China spend more

China

Australia

S.Korea

Brazil

France

Germany

Japan

U.K.

Mexico

Canada

Australia

India

France

China

Germany

Brazil

Mexico

U.K.

Japan

Canada20.0

13.4

3.9

3.4

1.7

1.3

1.2

1.1

0.9

0.8

$20.8

14.6

11.6

8.7

5.9

5.8

5.0

4.1

4.0

4.0

Parting with cashVisitors from China ranked among the top 11 in head count and they were No.7 in spending last year.

1

2

3

4

5

6

7

8

9

10

1

2

3

4

5

6

7

8

9

10

International arrivals to the U.S.International arrivals to the U.S. International visitor spending in the U.S.International visitor spending in the U.S.

Rank In millions Rank In billions

145

CHINA’S INVESTMENT OVERSEAS

146

China’s overseas investment is surging

147

China’s ODI is stepping up

148148

Outward Direct Investment: Flows and Stocks, 1981-2010

USD bn, BOP flow data

Source: PBoC, SAFE, RHG

Stock: $245.75 billion

149

China ODI flow 2003-2009, total $177.2 billion USD

$1.0

$1.2

$1.2

$1.2

$1.7

$2.0

$2.2

$2.3

$3.6

$5.3

$5.4

$8.0

$24.6

Kazakhstan

Macau

Pakistan

Korea Rep

Canada

Russia

United States

Luxembourg

Singapore

Australia

South Africa

Br.Virgin Is.

Cayman Is

Hong Kong $102.1 billion USD